Thoughts on the Bank Tax

I’m in favor of the bank tax; what’s not to like about extracting $117 billion from large banks to pay for the net costs of TARP? But it’s by no means enough.

Simon covered the main points earlier this morning, so I’ll just add three comments.

1. Why $117 billion? Because that’s the current projected cost of TARP. But everyone realizes that TARP was only a small part of the government response to the financial crisis, and the main budgetary impact of the crisis is not TARP, but the collapse in tax revenues that created our current and projected deficits. So why not raise a lot more?

2. The tax isn’t going to prevent a future financial crisis. And it isn’t going to hurt any bankers, at least not very much. Basically it will get passed on to customers, and shareholders will take a small hit. The best thing about the tax is that it helps level the playing field between large and small banks. From Q4 2008 through Q2 2009, large banks had a funding cost that was 78 basis points lower than that of small banks, up 49 basis points from 2000-2007. Closing that gap could lead some of those customers, faced with lower interest payments on deposits or higher fees, to take their money elsewhere. (Of course, they are already getting lower interest and paying higher fees, so there may not be much of an effect.)

But the tax isn’t nearly big enough! It’s being calculated as 15 basis points of uninsured liabilities, calculated as assets minus Tier 1 capital minus insured deposits. 15 basis points is a lot less than 78 basis points. And if the FDIC cost of funds data are based on all liabilities (not just uninsured liabilities),* then charging 15 basis points on uninsured liabilities only increases the overall cost of funds by about 7 basis points (at least in the administration’s example). This doesn’t come close to compensating for the TBTF subsidy.

The big banks will fight this, of course; they will claim that it simply increases the costs of doing business in America (although most individuals or firms can avoid those costs simply by switching banks. From a PR perspective, they would probably be better off smiling and handing over the money; if all they have to fear is a tax of 6 bp on total assets (again, in the administration’s example), then they really have nothing to fear.

3. Because it’s a flat tax with a cliff at $50 billion in assets, it isn’t going to provide an incentive for banks themselves to get smaller; Bank of America is not going to break itself into 45 pieces to avoid a 6 bp asset tax. If the tax had been graduated (bigger banks pay a higher percentage), then it might have had some small effect, although again the tax is probably way too small.

* I couldn’t tell in the fifteen minutes I spent on the FDIC web site–as I’ve often noted, what an awful web site! The Federal Reserve wins that contest hands down.

Update: Sorry, I just realized I didn’t link to the Dean Baker and Travis McArthur study that has the 78 bp figure. Now I have (both above and here).

By James Kwak

34 responses to “Thoughts on the Bank Tax

  1. When a few banks get into trouble, the root cause lies with the bank management. When a large number banks fail to the point of jeopardizing the stability of the world, the root failure is the government.

  2. Everything else are distractions from fixing the root problem.

  3. I like this way of calculating “covered liabilities”. These are precisely the liabilities taxpayers are implicitly insuring thanks to “Too Big To Fail”, but for which the banks are not currently paying any insurance premium (as they do for FDIC-insured deposits).

    I agree the tax is way too small and that it should be graduated to become downright draconian at some point, probably tied to percentage of GDP.

    All the stuff about “repaying TARP” is noise and spin. The reality is that this is fundamentally a great idea that just needs to be cranked up a bit.

  4. This was a nice post. I think broadening the net to $50 billion in assets down from $100 billion makes it more likely this will stall in the Senate. The $50 to $100 billion banks pose no systemic risk. Perhaps some White House staffers are thinking about their careers at GS… Today’s proposal is a disappointment compared to what was floated earlier.

  5. If a bank is to make a profit the incidence of the tax is passed on. This is a liability tax which might be an be offset from the interest otherwise earnable on loans to the bank. This would be an excellent tax if it were placed against all deposits and loans of the bank with proceeds used to insure the deposit. That is, the fee is subtracted from interest proceeds credited or payable to the lender of funds to the bank. If the government were serious about it the tax might also be a fee based on bank lender receipts even if overnight. That is, the interest recipient gets less.

    We had a run on the banks by the shortest term lenders. I do not blame these people from running the banks as I did money market funds quite early on in the crisis. The worst effects of what happened were caused by lenders to financial firms fleeing. The investment banks tanked from very short term paper not rolling over.

    This tax is a sop to reduce citizen rage. Not much more than a nuisance tax. This tax might just mutate into a long term trap type of tax like the long standing , but now dead, Indiana Gross Income Tax. But the tax will be collected from lenders to the institution since these top 50 banks will set rates that guarantee that the tax incidence is shifted to bank lenders whose loans are the source of the tax if no other easier shifting is doable. That is the tax is passed on to the borrower. I can readily see it as a separate fee charged to the bank borrowers although that is not necessary. This methodology would humorously satisfy the populist mantra about transparency.

    If the government is serious about where the incidence of the tax lies they might impose the tax on and withhold the tax from dividends on a cumulative basis if needs be. That would be quite upsetting since a major portion of the citizenry requires dividends in retirement like me.

    So all in all the banks should quietly accept this gift as a way to settle the beef with the state and pass it on. They have numerous ways to do so.

    The people who are really in a rage you do not directly hear from in the cacophony of angst over bonuses. These are the people who lost big from their retirement savings of any stripe just before they move into retirement age.

    This proposal verges on the brilliant if the administration conveyed the understanding to the banks that they get far worse if they do not shut up and accept the cost . For example, why not impose an excise tax on the bank tied to bonus payouts. After all, shareholders saw that the incidence of bonus payments were passed on because the banks delivered high profits. If bonuses were not sufficient to cause a shareholder revolt ( a joke) this kind of levy on bonuses will control bonus payments if they cannot be passed on. If the incidence of both the bonus and the excise tax is passed on and the bank still makes superlative profits the shareholders will still be very happy.

    So the banks can avoid a lot of problems by accepting this pittance of a chastisement to provide political cover in an election year. Are they smart enough to simply shut up and suffer for a short while? These bank big shots are paid to be smart. A proof may be at hand.

  6. Political disease with financial/economic symptoms, etc.

    This, if passed, might actually treat the disease but probably not cure it.

  7. I think this is actually a punitive penalty tax to be extracted from bank customers! Management may be publicly ‘dismayed’ at another call on profits but it will only cause further fees be gouged from us lemmings.

    The way to leave a lasting and salutary impression on a bank is to cause the bank’s board to be unimpressed with management and issue directives to management instructing management to stop previous actions immediately!

    What will make this happen?

    Banks to handover shares which we can convert to cash on Wall St!

    Let us see the directors, charged with a responsibility to maximise shareholders assets, be faced with a shareholder loss! This will quickly motivate boards to give required directions to cowboy management.

    Banks be liable from shareholders funds!! An instant motivation to change procedures. This will also ‘encourage’ bank armies of PhDs and MBAs to not search for new gouging ideas. Furthermore the President to make clear that this recovery process will again be used if unethical practices are again used.

    I suggest his will encourage self regulation. However the Glass/Steagall reinstaterment is still required. together with putting in place a procedure which will safely handle a bank closure as big as ‘GS’

  8. are you sure its not because the banks captured the government or regulators or both? after all if banks can get the government to do what they want short term, the long term effect may not be good for the country

  9. i doubt you will ever see the directors of these banks ever be displeased with management, after all management selected them, and in some cases appointed them even if a majority of shareholders didn’t vote for them. and as for passing on the tax, what better way to encourage ones customers to leave than by raising your prices? how do you get a shareholder loss from this?

  10. The tax is clearly meant to be just anodyne appeasement of the peasantry. So it’s pegged to alleged TARP costs for the same reason as the overarching government/MSM lie that the TARP is synonymous with the bailout.

    And so the fact that it won’t hurt the banksters at all nor is it an incentive to get smaller are features not bugs.

    But everyone realizes that TARP was only a small part of the government response to the financial crisis

    Do the people realize this? It just occured to me that I haven’t seen poll data asking questions about stuff like that. Has there been any such polling?

    (I intend to go looking, but if anyone knows of any I’d like to hear about it.)

    I imagine pollsters mostly work for the system, so they’re probably no more eager to educate the people than the MSM are.

  11. Perhaps five thousand people understand this stuff who are not participating beneficiaries. 95% of the rest do not know what TARP is and care only if they have a job.

    Media spin works just like advertising works, by being the only noise people here. Oh wow, look; the banks paid back the TARP and are still being taxed on it. The system works!

    How many people understand the bailout is over 20 trillion dollars? Those upset about all this must simply face reality: either the bailout succeeds and we are two or three years away from an inflation firestorm, or the bailout fails and the financial markets will implode with a bigger bang than last time.

    No need to analyze all this lipstick on the pig. Just keep your fingers crossed and stay away from population centers.

  12. noise people here? Well, turning off spellcheck has its downside.

  13. Jake, I think your math is a little fuzzy. The population of the United States – 5,000 people does not equal 95% =)

  14. Nice article.

  15. Maybe banks will pass it on to their customers, sure. Just don’t keep your deposits at a large bank. Allow me to pitch a pertinent website:

    http://www.moveyourmoney.info

    Only my rent deposit is kept at a TBTF bank (BAC) at a dismal 0.10% rate. Time for a chat with the landlord!

  16. I would rather see the banks/title holders required to pay property tax on foreclosed properties in their respective states.

  17. Congratulations! This is the first time that “scale in itself” is being taxed and that is THE crucial idea from “The Quiet Coup”.

    Cheers
    Claus

  18. So what? use a smaller bank and the problem you outline does not exist! It should cause mega-bank customers to flee to the local small banks, so let them jack up their fees!

  19. NKlien1553,

    Population: 270 million; minus 5,000 = 269995; times .95 = 256495 to whom TARP is a mystery. Is this high?

    If you are Disaster Capitalism I enjoyed your book. Do you agree on the 20 trillion?

  20. People with half a brain consider how they’re going to get their money back, BEFORE they lend it.

    Ask: Why did we lend the money?

    To save GS? To save AIG? To make bigger banks?

    I don’t think so.

    Glass-Steagall was put in place to protect deposits from risky traders. Who repealled it?

    Exchanges are responsible for managing counter party risk. Who signed the Commodity Futures Trading Act of 2000?

    Money wins votes. Who made money cheap?

    REFORM THE REFORMERS!

    PS. Do what you want to the banks, they are charged with creating value, and will therefore always be ahead of the US government, no matter how many retroactive tax laws they write.

  21. The large banks are still broke. Have all those garbage assets magically risen in value? No. I’m sure this will get Obama some extra poll points but it sure sure as hell won’t the help the fragile banking system that is still probably insolvent.

  22. Interesting, and agreed that the tax would be substantially too small to compensate for the overall economic loss created by Wallstreetism’s part of the overall collapse of our economy. Not only is there a substantial loss of Federal revenue (and increase in costs, specifially in social programs necessitated by the collapse), but a huge substantial (and ongoing) loss of state and local revenues, both related to income tax AND property tax (which has a huge impact on education funding).

    I would say that even the 78 bais points should be doubled, or at least the COF to the TBTF’s should be substantially more than that for the small and medium sized banks who are going to spearhead any return to growth in the economy. Perhaps this would result in a reallignment that must happen to get us back on track. Go ahead and let the TBTF’s move overseas — it is obvious that their ne’er-do-well ways will not be welcomed by any of the world’s countries that are still struggling to overcome the global downturn. And, nowhere will any country be willing to sponsor their wayward policies that have generated the kinds of profits that have enabled a further raping of our taxpayers.

  23. Jake,

    LOL, no I’m not Naomi Klein. My first name is Nolan, and I’m just a high school teacher. I liked her book too though. You said only 5,000 people in the whole country understand “this stuff.” What I thought you meant by “this stuff,” was that the $750 billion in TARP rescue funds was only a small part of the overall financial bailout. My point was that 5,000 people is way less than 5% of the country. For your statement to be accurate it would have to be like 99.999% of the country doesn’t understand this stuff. Is that a hyperbole? Probably. But I’ll say this: I haven’t met anyone in real life who really understands “this stuff” either, so maybe your is accurate. =)

    As for the $20 trillion, it’s my understanding that number is the notional value of all the various toxic assets the Fed has guaranteed or otherwise exposed itself to. I have no idea how much of that will prove worthless, but unless the real economy starts to improve I suspect some significant portion will. I do know the FDIC has been hiring a lot of staff recently, apparently in the expectation that many smaller banks are going to be failing. So it seems like at least part of the government believes a fair share of that $20 trillion is junk. Then again, some assets have actually risen quite a bit, and the FED banks have just posted record profits, so I just don’t know.

  24. NKlein31,

    The $20 trillion has been loosed on the world by the Fed and the Treasury. The idea that the Fed has somehow acquired ‘assets’ that will prove to have ‘value’ is simply fantasy. Remember that $1.7 trillion of mortgages were deployed to create at least $20 trillion of CDOs. That number may be low. It is now clear that most of the mortgages will default, that none will be repaid in accordance with the terms. You also have securitized credit card loans, car loans, student loans. None of the toxic assets is an asset in any sense of the word. Do you really think people will be lining up to buy these things?

    The only question is whether the Fed and the Treasury can engineer an inflation vast enough to validate the debt pyramid. Normally, inflation requires a debt engine, but this time personal debt continues contracting while the bankers manufacture phony profits in emerging markets and the US stock market.

    $20 trillion was created out of thin air to save the privileges of selected bankers. Meanwhile, those on the non bank side of the toxic waste received no bailout.

    The spin is that corporate profits derived in export markets will drive a US recovery. Our future is now tied to consumption of cheeseburgers and coca cola video games and movies in Peru and China? In the Eighties, the corporate sector abandoned America as a manufacturing base. Now it is abandoning America as a market. For nearly twenty years, the American economy has been based largely upon real estate changing hands at ever increasing prices. Plus the sale on credit of worthless life style drek made with coolie labor overseas.

    My prediction is that the new US economy will be grounded in ‘security’ and ‘antiterrorism’. By scaring people relentlessly, corporate government will replace business regulation with personal regulation invading every aspect of private life. Imagine Rumania with lower math and gymnastic aptitudes and higher ratings on collegiality. Expect increasing shortages as fewer people command purchasing power and corporate businesses cut inventory to the bone. Wall Mart will be running Toilet Paper Tuesday. Blogs like this one will be shut down as “Pessimistic’. We will all be expected to rally round the Executive, drive shitty little cars; expect him or her to be a movie star or sports idol. Derek Jeter would be perfect. Think of it as our own Cultural Revolution.

  25. Well, at least this tax shows a little progress as most posters seem to agree. But I also agree that Obama needs to be punching a lot harder. I have been in banking over 30 years but never “investment banking”. I have dealt with the issue of performance bonus’ both for myself and those I have supervised but never at the astronomical level bandied about on Wall Street. The principal is the same, however. How, and at what level do you reward and incent an employee for very good performance? The buzz word “entrepeneur” keeps getting thrown around. You can attach all the complex compensation formulas you wish in any situation but the fact remains that these clowns have no downside like a real entrepeneur.If they nailed a shingle on to the side of their Manhattan brownstone and practiced their craft in the basement they wouldn’t earn the billions they are taking. What’s that government guaranty, implicit or otherwise, worth. This is just a start.

  26. Sorry, I’m with the British on this.

    Tax the BONUSES and clawback the false profits that are a direct result of government attempts to re-capitalize FAILED institutions–money that should not have been paid out but stayed *in* these institutions in order to better accomplish the government’s aim.

    The effect of this on the employee is that the employee recognizes the critical importance of risk management, of working for institutions that stay solvent, that do not merely engage in kleptocratic cash out schemes, schemes that should be ILLEGAL in any TBTF institution–and which should be actively prosecuted by the DOJ.

    To say anything else is to already be captured by the bonaz culture. A lot of these people should be headed to prison. They should give the money back and say “thank you.”

    You will never fix this problem if you keep loading the cult up with money, allowing them to detach themselves from reality, and feeding their psychotic sense of entitlement.

    Stop it. Insist on the original government goal of recapitalizing the institution and CUT THE PSYCHOTICS OFF.

  27. You know, lots of innocent people lost money in this. I think blogs like this should get off the obfuscatory banking/government propaganda/distraction campaign.

    At the root of this whole problem is compensation schemes.

    FIX IT!

  28. You will not be recovering any amounts from those who made the money on the crisis, that money’s long gone now, but from the future depositors and borrowers who will have to pay for it all by means of receiving lower returns and paying higher interest rates.

    So sorry, I thought our banks should be efficient financial intermediaries and not fiscal cash-cows, and the government should collect its taxes only from the final economic growth that banks have helped to foster.

    It is indeed worrisome to see how, instead of correcting the regulatory actions which has helped the banks to generate monstrous margins the taxman seems more set upon participating in the feast.

  29. Predatory Lending is a major contributor to the economic turmoil we are currently experiencing.

    Here is an example of what I am talking about:
    Scott Veerkamp / Predatory Lending (Franklin Township School Board Member.)

    Please review this information from U.S. Senator Jeff Merkley regarding deceptive lending practices:
    “Steering payments were made to brokers who enticed unsuspecting homeowners into deceptive and expensive mortgages. These secret bonus payments, often called Yield Spread Premiums, turned home mortgages into a SCAM.”

    The Center for Responsible Lending says YSP “steals equity from struggling families.”
    1. Scott collected nearly $10,000 on two separate mortgages using YSP and junk fees. 2. This is an average of $5,000 per loan. 3. The median value of the properties was $135,000. 4. Clearly, this type of lending represents a major ripoff for consumers.

    http://merkley.senate.gov/newsroom/press/release/?id=A09C6A80-537A-4EB1-83C5-31925F046B6F

  30. It is interesting to see how the Obama administration will treat the CIT Group’s case (already mentioned by Prof. Johnson in his BBC interview).

    The bank is definitely Too Big To Fail under the newly proposed Financial Crisis Responsibility Fee (because its $60-71 billion assets exceed the $50 billion treshold), and it even received one helping of the TARP money (apparently not enough), and yet it was eventually allowed to fail… so in fact the insurer has defaulted on his part of the deal.

    Cynics amongst us might even suspect that the Treasury silence about its true intentions was not merely a classic case of ‘divide et impera’. The Obama administration might have also waited for the CIT to emerge from Chapter 11 bankruptcy (which it did in mid-December) before they could set the asset treshold for its new TBTF insurance premium low enough to cover the CIT Group as well.

    After all, the $2.3 billion lost on the CIT recapitalization was the lion’s share of the running total of the TARP’s losses in the banking sector ($2.6 billion). So imagine the public outcry if these guys were to be later excluded on a technicality (if the bank levy treshold were set too low, e.g. at $75 billion), even if banks of their size arguably do not pose much of a systemic risk. Or do they? Does size really matter? Are 9 CIT-sized banks holding normally diversified, but conditionally highly correlated porfolios any different than one big Lehman Brothers?

    Of course the Obama bank tax has several refreshing advantages: it is fairly simple (unlike Basel II) and thus robust to both bona fide model misspecification and industry gaming, it introduces a monetary disincentive for over-leveraging (the rate could be even ‘progressive’ – on a sliding scale or tiered), prices the free ‘insolvency put’, and precisely defines the eligibility for bailout money. If TARP were restricted strictly to institutions posing real systemic risk (or at least to the financial sector), excluding the automotive industry for example, then taxpayer’s losses would not be so large now.

  31. @jmb27, absolutely right about predatory lending, but a bank tax won’t fix that.

    @OP, we shouldn’t have been in this situation in the first place. As it is, the bank tax seems more like a political stunt than anything else. TARP should have been designed better from the get-go. My take: http://www.frontieroutlook.com/?p=57

  32. “Why $117 billion? Because that’s the current projected cost of TARP.”

    Heck, as you and other commenters have noted, what’s remarkable about this is that it’s being sold as a basic matter of fairness, recoup the governments costs (although that doesn’t even really begin to cover it).

    Frankly, given the political mood right now, marketing a larger bank tax as nothing more than punishment, would be a surefire political winner amongst the people (although not so much with the campaign donors).

  33. As you comment the tax will be passed onto customers. One side of government wants to raise interest rates, while the other side is trying to keep them low. It seems like vandalism to me.

    If you would raise the tax significantly on those making >$500k a year I think you’d do a lot to level the political playing field, and increase stability.

  34. I can only assume that this article was written for some particular class or group of people; I am just not sure who. It would seem that the largest banks have the largest amount of customers. This would mean that the author, in promoting this “bank tax”, and stating that the cost will be passed on to the customer, is in fact promoting a tax on all the working people who use the bank.

    Way to go; yet another tax on the working class, from the government that promised no taxes on the working class.

    I really don’t understand how people such as the author, promote these ideas as good, when they know that this type of tax will be passed on to those who are already hurting in this economy.

    This is the blinders that I see constantly with the financial crowd that bows and scrapes to the current administration; tax all the big companies and ignore that this comes out of the pockets of the working men and women who buy the products or use the banks!

    I think the government should just have us send our tax money to Smith Barney, where they can make money for the government the old fashioned way. Our government should invest wisely to make money, not take more and more from working class people. And trust me, bailouts are not a worthwhile investment…